Recent Changes — Finance & Taxation

The Institute on Taxation and Economic Policy published the 7th Edition of Who Pays?, its periodic distributional analysis of state and local tax systems. Key findings for Pennsylvania:

• Pennsylvania's lowest-income 20% pay 15.1% of income in combined state and local taxes — the highest rate on low-income families in any U.S. state.
• Pennsylvania middle 20% pay 11.4%; top 1% pay 6.0%. The lowest 20% pay 152% higher rate than the top 1%.
• Pennsylvania ranks 4th most regressive state and local tax system nationally.

Affects: State and Federal Burden Distribution · all sub-domains by reference.

Following a 2024-2025 legal challenge, Philadelphia's $100,000 BIRT (Business Income & Receipts Tax) gross receipts exemption was eliminated effective Tax Year 2025. Every Philadelphia business — first-year food trucks, sole-proprietor hair braiders, part-time freelance graphic designers — now has a BIRT filing obligation regardless of gross receipts size. The threshold-discontinuity (or "notch") effect that previously existed at $100,000 has been eliminated, but the tax now applies at much lower gross receipts than before. The structural increase in the number of very small businesses with BIRT filing obligations is material; the city has not accompanied the elimination with administrative simplification for the smallest enterprises.

Affects: BIRT.

Effective July 1, 2025, multiple Philadelphia tax rates were adjusted as part of Mayor Cherelle Parker's first budget cycle:

• Wage tax (residents): 3.75% → 3.74%; scheduled reduction to 3.70% by 2030.
• Wage tax (non-residents): 3.44% → 3.43%; scheduled reduction to 3.39% by 2030.
• Net Profits Tax: 3.74% (residents) / 3.43% (non-residents).
• School Income Tax: 3.74% (residents).
• BIRT gross receipts: 0.1415% → 0.141%; scheduled elimination by 2039.
• BIRT net income: 5.81% → 5.71%; scheduled reduction to 2.8% by 2039.
• Use & Occupancy Tax $2,000 exemption: ends January 1, 2026.
• Real estate transfer tax: 3.278% → 3.578%.
• Homestead Exemption: increased to $100,000 (from $80,000); average annual savings ~$1,399.

The 2025 OPA revaluation also took effect this cycle, increasing the average single-family tax bill by approximately $330. The combined property tax millage for 2025 is 1.3998% (0.6159% city + 0.7839% school district). The School District's share of property tax revenue rose from 55% to 56%.

Affects: Wage Tax · Property Tax · BIRT.

The federal tax legislation signed July 4, 2025 made several material changes that affect this domain:

• TCJA individual income tax provisions made permanent — brackets, the increased standard deduction, §199A, and the Child Tax Credit increase are no longer sunsetting.
• Standard deduction (2025): $15,750 single / $31,500 MFJ.
• Child Tax Credit: $2,200 per child (up from $2,000); $1,700 refundable portion.
• SALT cap: raised to $40,000 through 2029; reverts to $10,000 in 2030.
• New senior deduction (2025-2028): $6,000 per qualifying senior, phased out above $75,000 single / $150,000 MFJ MAGI.
• QOZ program made permanent with modifications creating a rolling 10-year benefit structure.
• NMTC program made permanent. Statutory stability raised to high.

The aggregate distributional effect is favored for higher-income households (SALT cap, §199A permanence) with modest adjustments for lower-income households (larger standard deduction, larger Child Tax Credit). For a PA-3 household at $32,000, the changes mostly do not interact materially with their tax situation, because the standard deduction and EITC already zero out their federal income tax; the household's burden remains concentrated in payroll tax, wage tax, state PIT, and sales tax — none of which OBBBA materially changed.

Affects: State and Federal Burden Distribution · Tax Incentive Programs.

Governor Josh Shapiro signed the 2025-26 Pennsylvania budget on November 12, 2025, enacting the Working Pennsylvanians Tax Credit — the first state EITC in Pennsylvania history. After 54 years without one, Pennsylvania joins 31 states plus DC. Key parameters:

• Credit equals 10% of federal EITC; maximum $805.
• Refundable credit; first year of claims is Tax Year 2025 (returns filed in 2026).
• Eligibility: must qualify for federal EITC (or meet federal requirements while filing with an ITIN).
• Administered by the PA Department of Revenue; automatic via PA-40 filing for anyone who claims federal EITC.
• Estimated state aggregate benefit: approximately $225-280 million annually.
• Average household benefit (UWP estimate based on 2022 federal EITC claims): approximately $220.

The 10% rate is at the low end of state EITC rates nationally — most range 10-50%, with many states at 30%+. The credit is structural progress; it inherits all the access barriers of the federal EITC because state eligibility is determined by federal filing.

Pennsylvania also enacted Act 45 of 2025 the same day, decoupling from specific OBBBA federal provisions (primarily for corporate tax treatment); the corporate net income tax rate is confirmed at 7.99% for 2025, scheduled to reach 4.99% by 2031.

Affects: EITC, VITA & the new state credit · Wage Tax (constituent-level integration).